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Economics of Finance
Lecturer: Svetlana
Tutors
Yang Song
E-mail address: yang.song@unimelb.edu.au

Yang Song (ECON90034) Tutorial 1 March 2016 1 / 15

 1 Demand, supply and equilibrium
Question information

Perfectly competitive with no regulation

QLD = 30 i
QHD = 60 2i
QTS = 6i

Yang Song (ECON90034) Tutorial 1 March 2016 2 / 15

 1 Demand, supply and equilibrium
(a) Aggregate demand supply and equilibrium

Total demand

QTD = QL + QH
= 30 i + 60 2i
= 90 3i

Total Supply
Q S = 6i
Yang Song (ECON90034) Tutorial 1 March 2016 3 / 15
 1 Demand, supply and equilibrium
(a) Aggregate demand supply and equilibrium

Equilibrium interest rate

QS = 6i = 90 3i = QTD
i = 10
Equilibrium quantity of loan
QTD = 90 3i = 90 3 10 = 60

Yang Song (ECON90034) Tutorial 1 March 2016 4 / 15

 1 Demand, supply and equilibrium
(b) Individual Consumer Surplus

Low income group

QLD = 30 i = 20
1
CSL = 20 (30 10) = 200
2
High income group
QHD = 60 2i = 40
1
CSH = 40 (30 10) = 400
2
Total CS &PS
CST = CSH + CSL = 400 + 200 = 600
1
PS = 10 60 = 300
2
Welfare
W = CS + PS = 600 + 300 = 900
Yang Song (ECON90034) Tutorial 1 March 2016 5 / 15
 1 Demand, supply and equilibrium
(b) Individual Consumer Surplus

Graph

Yang Song (ECON90034) Tutorial 1 March 2016 6 / 15

 1 Demand, supply and equilibrium
(c) interest rate ceiling

Quantity supply
Q S = 6i = 6 8 = 48
Quantity demand

QTD = 90 3i = 90 3 8 = 66

Excess demand

ED = 66 48
= 18

Yang Song (ECON90034) Tutorial 1 March 2016 7 / 15

 1 Demand, supply and equilibrium
(c) interest rate ceiling

Graph

Yang Song (ECON90034) Tutorial 1 March 2016 8 / 15

 1 Demand, supply and equilibrium
(d) Rationing

High income group

QHTrade = 60 2i = 60 2 8 = 44
1
CSH = 44 (30 8) = 484
2
Low income group
QLTrade = 48 44 = 4
1
CSL = 4 (22 + 18) = 80
2
Total CS
CST = CSH + CSL = 484 + 80 = 564
Total PS
1
PS = 8 48 = 192
2
Welfare
W = CS + PS = 564 + 192 = 756
Yang Song (ECON90034) Tutorial 1 March 2016 9 / 15
 1 Demand, supply and equilibrium
(d) Rationing

Consumer Surplus

Yang Song (ECON90034) Tutorial 1 March 2016 10 / 15

 1 Demand, supply and equilibrium
(d) Rationing

Producer Surplus

DWL
900 756 = 144

Yang Song (ECON90034) Tutorial 1 March 2016 11 / 15

 2 Exchange Rate
(a) US decreases subsidies to sugar farmers

Yang Song (ECON90034) Tutorial 1 March 2016 12 / 15

 2 Exchange Rate
(b) US decrease in demand to visit Australia

Yang Song (ECON90034) Tutorial 1 March 2016 13 / 15

 2 Exchange Rate
(c) Interest rates increase in Australia

Yang Song (ECON90034) Tutorial 1 March 2016 14 / 15

 2 Exchange Rate
(d) Free Trade agreement between AUS & US

Yang Song (ECON90034) Tutorial 1 March 2016 15 / 15